More Downgrades of World GDP, with U.S. as a Bright Spot

The World Bank has just announced it expects a signficant slowing of GDP growth in East Asia and the South Pacific regions. Its analysts reported that the drop could be “a full percentage point from 8.2 percent in 2011 to 7.2 percent this year.” More ominously:

The new report says that weak exports and lower investment growth will cut down China’s GDP growth from 9.3 percent in 2011 to 7.7 percent this year

It is one more warning that the world’s second largest nation by gross domestic product is in economic trouble.

The International Monetary Fund may make its own series of downgrades of growth in Asia and several other of the world’s largest regions, according to the press.

The United States, of all places, has become the one that analysts believe may buck the trend of economic trouble, the fiscal cliff notwithstanding. In a new FT-Brookings analysis, called the Brookings-FT Tiger Index, the groups raised concern about nearly all of the world’s developed and emerging markets:

The global economic recovery is on the ropes, battered by political conflicts within and across countries, lack of decisive policy actions, and governments’ inability to tackle deep-seated problems such as unsustainable public finances that are stifling growth. Growth in global trade has weakened and the spectre of currency wars, with countries looking to maintain export competitiveness by keeping their currencies weak, has returned to the fore.

But:

The US economy remains the sole bright spot, with economic activity, employment and financial markets all showing unexpected although still modest strength. There are signs housing markets have stabilised in many hard-hit areas, which could set the stage for a rebound in consumer demand. The Fed’s aggressive approach of combining unconventional monetary policy measures and forward guidance of a low interest rate path through 2015 seems to have contributed to a more benign outlook. However, the looming fiscal cliff and the prospect of continued political gridlock after the presidential elections is putting a damper on business and consumer confidence.

The comments by FT-Brookings analysts describe the fiscal cliff problem as a risk, but one which may be largely overcome by other forces in the world’s largest economy by GDP.

This is not the only instance recently pointing to America as the engine of whatever global GDP growth there may be, or at least a break on a GDP contraction. Since U.S. GDP remains mostly dependent on consumer spending, any predictions of a healthy American economy assume that the end-of-year shopping season will be strong, that homeowners will see what economists do about the value of houses and that the unemployment news for September will continue into the fourth quarter and into 2013.

So, imagine what a global engine the U.S. economy would be if Congress and the Administration resolved the tax issues and took away the fiscal cliff.

Douglas A. McIntyre